While volatility and uncertainty has hampered the global economy through the first half of 2022, one asset class that has managed to outperform expectations is carbon credits – a sign that the voluntary carbon market is reaching a new level of maturity and sophistication, carbon traders say.
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A basket of factors has mired the global economy through the first six months of the year -- Russia's invasion of Ukraine and the resulting energy crisis, rising interest rates prompted by high inflation, and post-pandemic recovery strains.
The confluence of these factors placed the economy in turmoil, with capitol markets in bear territory -- the S&P 500 has sunk by around 20% below its January high – and commodity markets thrust into a level of volatility not seen in recent history. Oil and gas benchmark prices have soared, industrial metals have tumbled, and agricultural commodities have faced supply bottlenecks stemming from the war.
But carbon markets have been relatively resilient over the course of 2022, investors said during Xpansiv's July 12 quarterly review and outlook of the voluntary carbon market. KraneShares Global Carbon Strategy ETF, or KRBN, which tracks cap-and-trade carbon markets, is trading 30% higher than it was one year ago. And nature-based avoidance credits and renewable energy credits traded in the voluntary carbon market are each trading 74% higher than last summer, according to S&P Global price assessments.
"Are companies going to stick to their climate commitments in this period of economic volatility, economic uncertainty and inflationary environment? The evidence says yes," said Rich Gilmore, CEO of the carbon investment firm Carbon Growth Partners.
"Unlike cryptocurrency or Bitcoin, the carbon market is underpinned by existentially important intrinsic demand for the end use of the product – a carbon credit exists to be retired," he said. "Our view is that there is stable and growing demand for carbon credits to be used as an emissions reduction tool."
Another indication of the voluntary carbon market's good health is the quality of credits that are being retired by buyers, and the unceasing rate at which retirements are occurring. While the number of credit retirements hasn't skyrocketed over the past year – a modest increase of 1 million between June 2021 and June 2022, according to Carbon Growth Partners – it's a positive sign that retirement rates didn't backslide, Gilmore said.
Guy Turner, founder and CEO of Trove Research, also notes the quality of credits that are being retired. According to him, in January and February of this year, 1% of all credit retirements were of 2020 vintages or later. In June, that shot up to 22%. Credits of more recent vintages often correlate to higher quality, as more scrutiny and third-party verification in the market has generally improved recent credits compared to those of older vintages.
"In spite of the economic headwinds, we're seeing buyers get more focused on [vintage] recency, on quality and on nature," Turner said. "Those are trends that are evidence based that I think should stand the test of time, and I think are indicative of a market that's maturing and getting more sophisticated."
One reason behind the carbon markets' strong standing is the recent profitability of the world's largest emitters throughout this period of economic turbulence.
"The companies that have the biggest emissions are extremely profitable at the moment," said Adam Raphaely, managing director of the commodity trading firm Mercuria Energy America. "If I think back to the financial crisis of '08, when the [voluntary carbon] market was trying to get started, you had a lot of people without the means to meet their commitments, whereas now a lot of the largest emitters are very profitable and have meaningful commitments that are not reversible."
This momentum is poised to accelerate as more corporate net-zero commitments continue to accelerate demand, said Gilmore.
"Every cyclone, every flood, every snowless December in Denver is going to increase the pressure on companies and countries to do more faster," he said.